The front entrance to the Bank of Canada Museum is pictured July 12, 2023 in Ottawa, Canada. (Photo by Dave Chan / AFP)
While Canada has narrowly avoided falling into an economic recession since 2021, according to the definition of the term, a major bank has pointed out that this does not align with the reality many Canadians are facing.
The Canadian economy grew by just 0.4 percent in the first quarter of 2024, after posting no change in the fourth quarter of 2023, according to Statistics Canada. Since the established definition of a recession is two consecutive quarters of decline in economic activity, the country has technically avoided falling into one.
However, a Royal Bank of Canada (RBC) report says the country’s “surging population growth,” referring to immigration numbers, is what has prevented outright declines in the GDP. Further, similar to what usually occurs during a recession, per capita GDP is falling and the unemployment rate is rising, as seen in six of the past seven quarters.
“Weaker demand spurred a rise in the unemployment rate of a size that historically only happens in recessions,” says the report titled “Canada’s economy might not be in recession but it feels like one.”
Some economists have suggested that while Canada has technically avoided a recession, it’s improper to focus only on GDP growth to gauge the health of the country’s economy, as stagnant GDP per capita should raise alarms.
“That is the more serious of the two issues, because recessions are generally temporary whereas declines in standards of living have the potential to become long term if we do not address productivity issues,” says Livio Di Matteo, an economics professor at Lakehead University.
Is Canada in a ‘Per Capita’ Recession?
Like many countries, Canada experienced rising inflation in 2021 due to increased government stimulus and disrupted global supply chains during the COVID-19 pandemic. The Bank of Canada responded by raising its key interest rate starting in March 2022, which contributed to the country’s slower economic growth. The key rate rose from 0.25 percent that month to 2.5 percent by July 2022, then to as high as 5 percent by July 2023 before being cut to 4.75 percent in June 2024 and 4.50 percent in July 2024.
Around mid-2022, Ottawa made its immigration policies more lenient, increasing Canada’s population by over a million people in 2022 and by nearly 1.3 million people in 2023. Ottawa embraced immigration in response to a worker shortage in some key sectors and the country’s shifting demographic trends, which saw the fertility rate reach a record low of 1.33 children per woman in 2022.
While increased immigration has put pressure on housing, health care, and education, it had the benefit of increasing consumer spending and preventing Canada’s fall into a recession. “Without higher population boosting demand, the Canadian economy almost certainly would have contracted outright over the last two years,” the RBC report said.
Di Matteo agrees. “There are simply more people buying things, and that has been keeping the economy going despite slowdowns in some other sectors,” he said.
However, he said there has been discussion among economists about whether Canada is in a “per capita” recession, as that metric has been steadily declining since 2022 to the level seen in 2019. According to Statistics Canada, GDP per capita would have to grow by an average annual rate of 1.7 percent for it to return to its pre-pandemic trend over the next decade.
“Falling per capita GDP is more an indicator of long-term economic welfare and economic productivity,” Di Matteo said. “If output is not keeping up with population growth, then the economy over the long term is demonstrating a decline in our standard of living.”
Other Metrics
Eric Miller, president and founder of Rideau Potomac Strategy Group, says economists and pundits have been saying that Canada appears to be in a recession because “large numbers of the population can’t afford what people have long thought of as the basic staples.”
This observation is underscored by Food Banks Canada’s “HungerCount 2023” report, which indicated that food bank usage in March 2023 rose to its highest level since the survey began in 1989.
Miller noted that while Canada’s real per capita GDP has risen much more slowly than that of the United States since 1981, comparing the two countries based on this indicator is less fair because the United States is an “incredibly innovative economy” with a population 10 times the size of Canada. However, compared to Australia, with a similar population size and abundant natural resources, Canada has still fallen behind.
Another key economic indicator is growth in living standards. Compared with the United States, Canada’s average living standard (measured in per-person income after adjusting for inflation) is 78 percent, four percentage points less than Australia’s 82 percent, according to a March 2022 Fraser Institute report. Meanwhile, Canada’s GDP per capita in 2023 was $53,431 versus Australia’s $69,732. Miller says this can partially be attributed to Australia focusing more on developing its resource and energy sectors than Canada has.
Miller said Canada’s overall GDP numbers “don’t reflect where the middle 60 percent of the economy are sitting.” He suggested examining more qualitative factors, such as the growth in income inequality, people’s outlook for the future, and business creation.
That’s not to say aggregate economic numbers like GDP are not important, he said. “They most assuredly are, but the reality of the situation is that a lot of people feel like they’re not doing as well as they should be able to.” And because the economy is different from how it was in the past, those numbers are also less useful for determining Canada’s economic health than they used to be, he added.
“If you’re 60 and make a good amount of money, your situation is very different than someone who is 30 and makes a reasonable amount of money, because you [would have been able to] afford to buy a house,” he said.
Miller said the federal government’s emphasis on Canada’s overall GDP as opposed to GDP per capita is partially an effort to “present the best story from the statistics.”
“But the challenge for governments who are looking at trying to translate these numbers into political strategies is that, if you only rely on the dry numbers and don’t understand how that plays out in Canada regionally or distributionally, you’re not going to end up in a very good situation,” he said.
Ian Lee, an associate professor at Carleton University’s Sprott School of Business, said Canada’s struggling per capita GDP is due to several “structural problems” in its economy, chiefly its poor productivity. This concern has been echoed by Bank of Canada governor Tiff Macklem, who recently warned that low productivity is the country’s “Achilles heel” and contributing to falling standards of living.
With Canada’s productivity and GDP growth rate lower compared to those metrics in the United States, while its unemployment rate is higher and the exchange rate is lower than normal, this reflects the “skepticism that investors have concerning Canada,” Lee said.
Lee also raised concern about Canada’s weak business investment per worker. Between 2014 and 2021, this metric fell from $18,363 to $14,678 in Canada, but rose from $23,333 to $26,751 in the United States, a 2023 Fraser Institute research bulletin says.
While the Bank of Canada and many analysts focus on the “comprehensive metric” of GDP, other metrics should also be used to gauge how an economy is doing, Lee said. “You’ve got to look at inflation. You’ve got to look at the exchange rate. You’ve got to look at interest rates. You’ve got to look at capital investments,” he said.
“Yes, GDP is important. It’s a bellwether. It’s a canary in the gold mine metric. But you should never just use it and nothing else.”